Barbarians at the Gate: The Fall of RJR Nabisco

The city of Winston-Salem, North Carolina, was a factory town serving the RJ Reynolds Tobacco Company, founded in the late 19th century by Virginian R. J. Reynolds. Instead of 20th-century corporate jets, Reynolds spent $240 a year on a horse team. His entrepreneurship, combined with the work ethic of Czech immigrants, “laid the foundation for the Reynolds corporate culture for decades to come” (42). As a Southerner, Reynolds “hated Yankee control, but there was no question he thrived under it” (43). The company’s Prince Albert tobacco was a national success.

In the 1890s, Buck Duke’s American Tobacco Company consumed regional counterparts like RJ Reynolds. However, Teddy Roosevelt’s “trustbusting” led to the dissolution of the trust, releasing RJ Reynolds and others for anti-trust violations. Reynolds offered its workers stock, which “paid an extraordinarily rich dividend,” and “took special care of its workers” (45). With the help of N. W. Ayer marketing, the company produced iconic brands like Camel. Reynolds died in 1918. By 1929, Lucky Strike surpassed Camel as the national bestseller, but Camel returned to the top spot in the 1930s. Winston-Salem was known as Camel City.

John Reynolds ran the company in the golden age of the 1950s, introducing the Winston filtered cigarette. Bownman Gray, Jr., “a typical executive of the day,” took the company over in 1959. In 1964, “surgeon general Luther Terry issued his landmark report linking cigarette smoke with cancer” (50). As a result, cigarette sales began to fall. Reynolds’ competitor Philip Morris, known for Marlboro, expanded into overseas markets. RJ Reynolds started to diversify by purchasing the oil company Aminoil. J. Paul Sticht, an outsider with a taste for corporate jets, joined the Reynolds board in 1968. In the late 1970s, he became the chief executive. That same decade, Phillip Morris began using electronic cigarette-making machines, while Reynolds continued using older machines. As a result of the lower manufacturing costs associated with the electronic machines, “[i]n 1976, Marlboro passed Winston as America’s bestselling cigarette, a position it holds to this day” (55).

Sticht’s two-year campaign for CEO divided the company “into warring camps” (57). The succession question led to “an insidious practice” called “loading” (57). Prior to raising prices, Reynolds dumped large volumes of product onto the market at the old prices, a practice that both unloaded old inventory and “produced large, artificial, end-of-quarter profits” (58). Though Sticht had some powerful supporters, in the end it was Tylee Wilson who became Reynolds’ chief executive in 1983, while Sticht remained on the board after retirement. Wilson worked to reshape the company, but his relationship with the board was “shaky” (64).

Hoping to turn Reynolds into a “consumer-goods superpower” that would challenge Procter & Gamble (64), Wilson went looking for another large corporation to merge with. After considering the likes of Pepsi and Kellogg, Wilson chose Nabisco Brands. As a result, Wilson met with Johnson and hinted that it would be Johnson who would lead the merged company after he retires in two or three years. The deal went through at $85 per share, “or $4.9 billion, at the time the largest merger ever to take place outside the oil industry” (66). Johnson “drove tough bargains on side issues,” including perks like corporate jets (66). The combined company was called RJR Nabisco.

Johnson relocated to Winston-Salem and was at first well-liked at Reynolds, though some compared him to “a used-car salesman” (69). The board of the merged company comprised five Nabisco directors out of 20. Johnson’s Merry Men did not like Wilson’s leadership because every decision “required multiple sign-offs and weeks of waiting” (70). After the first few months, some of Johnson’s aides were ready to leave, while Johnson urged them to be patient. Despite the disagreements, Wilson and Johnson got along well on business questions. Yet behind his back, Johnson mocked Wilson and the failing tobacco business.

In 1986, Sticht learned that Wilson had been trying to develop “smokeless” cigarettes without board approval for the past five years, spending $68 million. The secret project was called Project Spa, later referred to as Premier. This cigarette contained less tobacco and produced little smoke and tar, and Wilson hoped it would prevent consumers from quitting smoking altogether (74). Meanwhile, Johnson engaged in behind-the-scenes maneuvering to have some on the board privately suggest that he become the chief executive, meanwhile telling Wilson that he planned to resign if he wasn’t elevated to CEO. Johnson’s campaign was ultimately successful, and Wilson took early retirement with very generous severance package—what was known in business jargon as a “golden parachute.”

Ross Johnson was the CEO of Nabisco in 1984 and of the merged RJR Nabisco in 1986. However, he “still knew next to nothing about tobacco” (78), so he needed to keep experienced people like Ed Horrigan around. Even as he purged other Reynolds executives, Johnson plied Horrigan with perks, including a luxurious New York City apartment above the Museum of Modern Art.

Johnson found it difficult to fit into the conservative Winston-Salem community and was quickly bored of “running into the same people over and over” (80). His solution was to move the headquarters to Atlanta. Since it was widely understood that doing so in the wrong way “would kill Winston-Salem” (81), Johnson quickly “became a local pariah” (82). Reynolds workers who had job security now feared receiving pink slips, and “gallows humor flourished” (82). Ultimately, when the move was announced in 1987, only the corporate headquarters relocated. Some workers went to work in Atlanta, others stayed, and “only a few hundred jobs in Winston-Salem [were] lost” (84). The new headquarters featured “a clear caste system” (93, with Reynolds veterans feeling that “they shouldered much of the menial work” (93). At this time, RJR executives “lived like kings” (92). RJR Nabisco’s hangars at the Charlie Brown Airport were akin to the “Taj Mahal of corporate hangars” (94). The corporate jets allowed Johnson to lead a high life flying in celebrity athletes or politicians every weekend.

Within a year, Johnson had sold some of the company’s businesses, such as Prince Albert pipe tobacco, using the money to pay down the company’s debts. He considered making RJR Nabisco a limited partnership, which “signaled a change in Johnson’s corporate focus” (85). Wall Street investment bankers found Johnson easy to work with, as “the companies Johnson ran were in a state of constant flux, buying, selling, and reshaping their parts” (85). The idea for a limited partnership, “Project Alpha,” came from Wall Street’s “Mad Dog” Jeffrey Beck (86, 87). Its objective was to increase the value of the remaining common company stock. However, Project Alpha did not go through. Some hoped that Johnson would pursue the LBO idea, but at this time Johnson rejected it because banks “didn’t understand the need for golf tournaments and corporate jets” (89). In an LBO, the buyer funds the purchase of a company by taking on substantial debt through bank loans and the sale of securities. Typically, the buyer then covers this debt by selling off parts of the company. Despite his misgivings, Johnson met with Henry Kravis, “whose name was practically synonymous with LBOs” on Wall Street, in his Park Avenue apartment to discuss it but ultimately rejected it (100).